Based on our current back-log and ongoing discussions with larger corporates and private equity players, we expect a significant increase in M&A activity in Germany within the next 12 months. Increasing globalisation, digitalisation, industry 4.0, unsolved succession issues in Mittelstand companies, low interest rates and enormous liquidity in the markets will continue to be the main drivers for mergers and acquisitions. With the support of a booming German economy, the deal volume, in regards to the number of deals in the pipeline, is expected to reach a record high in 2019. Of course, this implies that no shock in the market occurs due to geopolitical events such as an escalation of the trade conflict between the US and the rest of the world or a failed Brexit consensus. It also assumes that the Eurozone economy is approaching 2019 in good shape, with an improving labour market underpinning household spending, rising intra-EU trade and growing business investment.
2. German Corporates eye American targets
German companies, especially larger quoted corporates, remain very keen to grow their business by acquisitions. Relying only on organic growth will not be sufficient to secure long-term competitiveness and justify the current high valuations on the stock market. The main driver for acquisitions remains the strong performance of companies, as well as target firms, in most cases, acting in familiar markets. Overall, we see significant interest from larger German groups to strengthen their presence not only in Western Europe but also in the US, China and other selected Asian geographies. After a certain reluctance in former years to invest in highly-valued American companies, German management teams have become more and more courageous in pursuing larger acquisition opportunities in the USA. The takeover bid by German building materials company, Knauf, for its American competitor, USG Corporation, was valued at more than US$ 7 billion and is a good example of this trend. Another visible deal is the envisaged acquisition of Linde’s gases business in North America by a team-up between the family-owned Messer Group and the financial sponsor CVC Capital. Admittedly, the US administration prohibits certain takeovers by Chinese buyers, but for German buyers, the situation changed rather positively under the presidency of Donald Trump. The latest tax reform makes it even more attractive for European corporates to acquire in in the USA.
3. Ideal exit window for German business owners
For German business owners, the time has never been as good as now to consider a company sale. The acquisition of a German competitor is on the top of the priority list for plenty of international groups. American and Asian strategic investors considering take-overs in Europe usually tend to focus on targets based in Germany, Europe’s largest and most prosperous economy. German companies are known for innovative technologies, automation know-how, professional structures and well-trained employees. The label „Made in Germany“ is still very attractive for foreign investors.
4. Increasing deals with Chinese buyers
In the last few years, many German mid-sized technology firms, often referred to as “hidden champions”, were acquired by Chinese corporates. In the sell-side processes that Lincoln International is running in Germany, Chinese buyers are regularly approached and are very active in reviewing opportunities. From a sellside perspective, the general view of owners and incumbent management teams on Chinese buyers has changed in recent years. Sellers initially had the expectation of a high selling price, paired however, with a significant amount of deal uncertainty. This is a thing of the past. Chinese buyers have been changing their image as fickle buyers to increasingly sophisticated and educated in terms of valuation, the structure of the sales process and communication with involved parties. This experience is a result of our recent transactions – notably the sale of aircraft supplier and composite specialist Cotesa to quoted AT&M in Beijing or the sale of Romacoto Chinese Truking Group. We strongly believe that the long-term outlook for takeovers by Chinese investors remains strong. In addition to China’s traditional industrial investments, future M&A activity will increasingly focus on fashion/retail, food and pharmaceuticals. Chinese investors, including state-owned companies, listed companies and private companies, will also pursue even bigger deals as the United States’ protectionist policies deter foreign buyers. Latest rumours surrounding the acquisitions of closing firm C&A or Deutsche Bank confirm this trend.
5. Private equity under huge investment pressure
In addition to strategically motivated buyers, private equity investors and family offices also show huge appetite for mid-sized companies. These buyer groups are under enormous pressure to invest and compete against other bidders for the relatively few available companies. Due to the fact that the number of attractive buy-out targets is rather limited in Germany, financial sponsors are becoming increasingly creative and are noticeably professionalizing their structures. By doing this, they continue to build up their sector know-how. This trend forces strategic buyers to pay increasingly higher prices to win the bid for their preferred acquisition targets.
6. High valuations
Most of the German corporates are enjoying strong current trading in 2018. Solid balance sheets, double digit profitability margins and strong order backlogs facilitate M&A transactions and drive valuations. High levels of dry powder, combined with low interest rates and a scarcity of solid assets, are likely to lead to a further increase of transaction multiples. Purchase prices are at record levels. For profitable and growing companies with a clear technological edge, double digit EBITDA multiples are increasingly becoming the norm and not the exception.
As more and more business owners believe that the M&A boom may peak next year, we expect that a lot of companies will come to the market.